Am I paying tax on my state pension twice? (2024)

Can you tell me if, after my personal allowance has been reduced by subtracting my state pension to create my tax code, I should then be including my state pension amount when I fill in my self-assessment?

I must do a self-assessment because I also get some foreign pension as well as a small UK teacher’s pension here. I always submit the UK teacher’s pension amount and all foreign pensions on my self-assessment return, along with the state pension, each year.

However, now that I know the relationship between the tax code and personal allowances, I realise I am not getting my full personal allowance each year and I feel I am actually paying taxes twice on the state pension

It does not feel logical to reduce my personal allowance to get the taxes in one instance and then charge me tax on the state pension again in my return.

Am I correct? I will appreciate if you could give me an answer to my query here as it troubles me a lot, even after I spoke to HMRC.

It is all pretty confusing and no one there will give me the reason in writing so I can digest it easily. I hope that you can either let me know if this is worth pursuing or where else I can get help with it.

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Steve Webb replies: The good news is that you are not being taxed twice on your state pension.

As you appreciate, state pensions and private pensions generally count as part of your taxable income. But whether you actually have to pay tax and, if so, how much tax, depends on how your total taxable income compares with your tax-free personal allowance.

To work out your tax bill at the end of the year, HRMC first add up all of your pension income, plus any other taxable income such as income from property etc. Next, they deduct your personal allowance, which is currently £12,570.

If your total taxable income is under your personal allowance, no tax is due.

If your taxable income is in excess of your personal allowance, you pay tax on the excess.

Tax is charged first at the basic rate of 20 per cent and then at higher rates depending on how much excess taxable income you have. (Different rates and allowances apply to things like income from savings and from dividends).

Based on the description above, you are fine to provide HMRC with details of all of your pensions and other taxable income and they will check at the end of the year whether the correct amount of tax has been deducted over the course of the year.

However, what HMRC also do is try to deduct the right amount of tax each month through the year so that no end-year adjustment is needed. And the way that they do this causes some confusion.

For most people, the amount of state pension they get is under the tax threshold of £12,570. (There are some people who get more than this in state pension but they are a minority).

DWP pay your state pension gross – before the deduction of any tax. What HMRC then do is offset all of your state pension against your tax allowance, and then use any unused tax allowance as a tax code to be used by the Teachers’ Pension Scheme and other pension providers.

You could argue that this means you pay ‘not enough’ tax on your state pension and ‘too much’ tax on your teachers’ pension.

But the only thing that matters is that at the end of the year you have paid the right total amount of tax, and this system produces the correct outcome overall.

To give a simple example, suppose that your state pension is £8,570 per year and you have a private pension of £9,000 per year.

HMRC calculate that with a personal tax allowance of £12,570 you have £4,000 of ‘unused’ tax allowance once they have taken account of your state pension (from which no tax has been deducted by DWP).

They send a tax code for £4,000 to the private pension provider. This means that the first £4,000 of your private pension is tax free and the remaining £5,000 is taxed at the basic rate of 20 per cent.

Over the course of the year you will pay £1,000 in income tax through this route.

As it happens, all of that £1,000 will have been collected by your private pension provider and paid over to HMRC. But at the end of the year HMRC will do a check.

They will say your total income (state plus private) was £17,570, that you had a personal allowance of £12,570, so you have taxable income of £5,000 on which 20 per cent tax was due.

By the end of the year your tax return will show that you should have paid £1,000 in tax and this is exactly the amount which has been deducted on your behalf, so no further adjustment is needed.

I am aware that tax issues can be confusing, especially for those with more complex tax positions.

For anyone of modest means who needs help, I can recommend the charity ‘tax help for older people’ who have hundreds of expert volunteers who freely give their time to help people navigate the system. Their website is here.